In association with Travelport
David Stevenson sees a battle emerging with the likes of Google pushing openness on pricing and big travel suppliers working in the opposite direction
Regular readers of this column will know that earlier in the year I turned really rather bearish, worrying that we were in dangerous, uncharted economic territory.
I found myself beset by worries that the global economy was slowing down inexorably after at least four years of expansion, that Greece was tumbling towards a nasty break with the eurozone and the UK general election was poised to deliver a messy result.
What a difference a few weeks make!
The UK election has resolved itself with admirable clarity, the global economy looks like it has not tripped into recession (yet), the prospect of interest rate rises seem to have been delayed until the end of this year at the earliest and it’s even possible that the Greeks may just manage to cling on – although I’m not entirely convinced that either side in this dysfunctional relationship are terrifically keen with the status quo.
My own sense now is that unless any nasty surprises come out of the Middle East, the Aegean or the Ukraine, we should be set for a very strong second half of 2015.
What will cheer the spirits of many in the travel sector is that I also believe we are about to witness another lunge downwards in the price of oil, past $40 a barrel.
Add it all up – surging UK consumer demand, the eurozone over coming its own self-inflicted injuries and cheap energy.
These collectively represent a fantastic headwind for strong summer 2015 sales and buoyant demand for winter holidays heading into 2016.
Given this increasingly benign though boring macro-economic backdrop, I’ve found myself drawn to a number of interesting developments within the travel sector, most of them coming out of the fast moving airlines segment.
The first noteworthy story ran just a few weeks back. Apparently Spanish outfit Iberia has succeeded in what I think could be a game-changer, namely auctioning bookings via a last-minute auction system.
The airline has apparently auctioned twenty return tickets to each of four popular destinations: New York, Miami, Paris, and Rome.
According to reports the auction portal had 100,000 users, 120,000 sessions and over 300,000 page views in the first twenty-four hours, with every ticket auctioned during that 24-hour period sold.
Iberia has now said it plans to adopt auctions as an ongoing feature of its flight promotions strategy, possibly extending out to daily auctions to different destinations.
Here’s the mix of registered users by age and gender:
- 7.5% aged 18-24
- 45% aged 25-34
- 26% aged 35-44
- 11.4% aged 45-54
- 7.1% aged 55-64
- Registered Users by Gender: Men 43%, Women 57%
For me the big development here is the way in which Iberia can use the auction process to engage with its customers in a meaningful manner.
Too many travel aggregators try to engage with their users via utterly pointless marketing content, but a regular auction process will engage their customer base, allowing the airline to talk to customers and engage in a set of wider conversations on social media.
Apparently Iberia have tried this auction process before – and failed – but a big IT upgrade and a better user experience online and via apps looks like it has finally paid off.
The rise of the last-minute auction phenomena will, I think, coincide nicely with a related development – the determination of leading travel product providers to interfere with pricing transparency.
Just as outfits such as Google try to raise the bar on providing consumers with seamless information about costs, my guess is that big airlines, cruise lines and travel giants will be doing everything in their power to move in the opposite direction, using data mining to provide differential, personalised pricing and exclusive deals with platforms to sell their content.
Over the last few weeks we’ve witnessed another notable skirmish in this ongoing battle, this time involving Amadeus and Lufthansa. The German airline has decided to impose a €16 ($17.80) charge on external reservations.
Lufthansa says it took the move because ticket sales on the GDS platforms were costing it at least €100 million a year. Not unsurprisingly investors in Amadeus took the move very badly, drastically marking down the online GDS providers shares by nearly 10%.
Bear in mind that Lufthansa was one of the founders of Amadeus in 1987 alongside Air France, Spain’s Iberia and SAS.
I think this is a big newsworthy development, although it is also very predictable.
It’s clear that the big airlines will all eventually move to this model, cutting out the intermediaries and encouraging travellers to either book direct with the airline or via a travel agent.
But the intermediaries absolutely provide a valuable price comparison service, enabling proper transparency into final costs.
So we have the makings of a real battle – on one side those looking for open, transparent pricing models, and on the other product specific platforms experimenting with auction models and personalised pricing.
One market where I suspect this push to cut back on transparency will founder is within the low-cost airline segment.
Traditionally outfits like Ryanair have resisted intermediaries and especially GDS platforms, although they’ve relented in recent years and moved on to key GDS platforms.
But as the European economic recovery gathers speed, we’re about to witness that most wondrous of business excesses – a vicious price war powered by excessive capacity.
We’ve already seen investor sentiment in easyJet sour as it warns investors about price weakness, while Ryanair’s recent surge in fortunes will no doubt encourage the inveterate price-cutter to push even harder on lowering air fares.
In this hugely competitive scenario my sense is that margins will tighten considerably and low-cost carriers will look to recover every spare % or £ of margin.
Yet I’d argue that the core problem isn’t whittling down every last penny of cost. The real challenge is capacity. So far, outside of IAG, we’ve seen little real attempt to constrict capacity within the airline sector in Europe.
But news coming out of America indicates that this might be about to change. The big US airlines – low-cost or otherwise – are at the bleeding edge of developments within the travel sector and we’ve started to see talk of fairly significant indications in capacity.
Analysts on Wall Street such as Darryl Genovesi at UBS AG argue that the big outfits such as Delta and United Continental are now pushing to match the supply of seats to travel demand.
Put simply, the US majors have all been engaged in oversupplying the market, eroding their pricing power just as the dollar strengthens.
That dollar strength is slowing down domestic growth and now is the time to reintroduce some much needed capacity discipline. Most notably for me is the news that Southwest Airlines Co – much the biggest domestic carrier – has backed off plans to increase capacity as much as 8% this year.
And sticking with the theme of US airlines, I noticed debate stirring stateside about the role of the frequent flyer miles system.
Ever since this marketing-led concept was introduced we’ve seen nearly all the major airlines jump on the bandwagon, introducing either regular or elite schemes.
But hardened cynics such as yours truly have long wondered whether these programmes are actually worth the bother, except perhaps for a tiny quantity of excessively frequent travellers.
Well, my suspicions have been confirmed – the big US airlines are now culling their programmes and switching to a focus on only rewarding the very richest travellers.
Southwest Airlines for instance changed their rewards programme as early as 2011, while Delta has not one but four elite levels with the top Diamond Medallion level requiring 125,000 miles a year, equivalent to 25 round trips between New York and San Francisco.
Intriguingly, most of the major airlines seem to be pushing undisclosed, invitation-only top levels based around concepts such as the global service customer where exclusive clients have separate check in areas and are moved quickly through security.
Concurrently US airlines are pulling away from affinity deals with big credit card issuers where customers can clock up huge numbers of miles solely by using their card for spending – airlines want evidence of spending and actual miles travelled.
These trends have gone side by side with moves to devalue the lower tiers. Increasingly I wonder whether the frequent flyer concept is actually worth the effort and bother for all but a tiny minority of travellers.
My guess is that within a few decades the whole concept will have vanished at the economy end of the scale replaced by new ideas such as auctions and data mined, personalised price offers.
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